We often plough so much energy into the big picture, we forget the pixels. --Silvia Cartwright
It seems fitting that as 2012 comes to a close, the only thing that really matters is the fiscal-cliff debate. Since the market low in 2009, the biggest change in the market action has been that stocks are highly correlated and we are much more reactive to macroeconomic news. Individual stock picking has taken a backseat to predicting what government officials will do next.
The current fiscal-cliff debate is a great example of this tendency. It doesn't much matter what stocks you pick right now. The key is to make sure you are on the right side of the headlines out of Washington. If you have a great stock pick but the news is bad, you are still going to have difficult time making money.
I'm sure there are traders who enjoy the volatility created by the macro headlines. It requires a particular mindset and it is necessary to employ a strategy that is focused mainly on overall market direction rather than individual stock selection.
My focus has always been on individual stock picking, so I find the focus on macro news to be quite frustrating at times. There are still stocks that buck the trend but even those often trade in a choppier fashion and are more susceptible to headline news.
What has probably made this tendency to react to news headlines even worse is the continued exodus of individual traders from the markets. Brokers and mutual funds have seen declining assets for years now which means the market is controlled more and more by large hedge funds and computerized trading, which employ strategizes that make individual stock picking seem like a quaint strategy employed by the naïve and uninformed.
I can complain at great length about how central bankers and politicians have screwed up the way the market operates, but our job as traders isn't to be nostalgic but to adapt and find ways to deal with the new conditions. Obviously, we have to spend much more time now trying to predict what will be the next major governmental news to move us. That means we have no choice but to obsess over this fiscal cliff debate like everyone else. It is the only news that matters and will determine the direction of the vast majority of stocks in the market.
I believe that we will have a fiscal cliff deal very soon, but if there aren't concrete signs of further progress by Friday, the market will become nervous and sell off. We had some nerves set in yesterday, after a terse comment by Speaker Boehner and name calling by various politicians. We should have a number of headlines during the day today and then market players are going to be very anxious to take a break and enjoy the holidays.
My game plan has been to try to focus on individual trades. I've had some success with names I've mentioned in the blog, but it has been very hard to put much money to work since conditions are so unstable due to the headline reactions. I'm going to continue to try to pick off some trades and look to be more aggressive when the fiscal-cliff uncertainty finally declines.
Early indications are for another mildly positive start. Traders are already starting to wind down for the holidays and the action is slower, but any major fiscal-cliff news is going to move this market very fast.